What FTSE 250 company can you find in your living room – or on your phone?
One answer is ITV (LSE: ITV). The broadcaster and production studio is a household name known across the nation. Yet its shares have more than halved in five years.
That means the dividend yield has been pushed up to 7.2%.
What has gone wrong for ITV? Is that high yield a warning sign, or a bargain for investors?
The bear case
I will start with a rundown of what investors dislike about the broadcaster.
In the short run there are problems around specific problems. From This Morning to Love Island, some of ITV’s big money spinners have attracted headlines in recent months — not necessarily for positive reasons.
Personally, I do not think that is significant when considering the investment case for the company. It produces and broadcasts a wide range of output. Inevitably, some of it will be controversial. I expect management will work to manage the company’s reputation.
I think what has really concerned investors is the longer term outlook for the FTSE 250 company. Terrestrial television is a bit like the cigarette business: it is in steady decline but still remains hugely profitable. Digital rivals like Netflix have stolen a march on legacy providers such as ITV.
Not only does that mean the business is playing catchup, it has also changed the underlying profitability of the advertising model. It is harder to take a big chunk of an advertising market spread across hundreds of digital broadcasters than it was in a world where most people had just a few commercial television channels to choose from on a daily basis.
Bull case
Still, ITV earned over £1m per day in post-tax profits last year. Its £2.8bn market capitalisation means the FTSE 250 business trades on a price-to-earnings ratio of 5. That looks cheap to me.
Terrestrial television continues to throw off large amounts of cash for the company. Advertising revenue in the first three months of this year slipped 10% compared to the same quarter last year. But it still came in at £420m, of which the majority came from non-digital channels. Given a wider advertising market slowdown, I see that as a resilient performance.
Meanwhile, the company has been growing its own digital offering to compete more effectively in an evolving media landscape. 389m of hours were streamed by ITV customers in the first quarter.
On top of that, the company’s production facilities mean it can make money from rivals’ need to make content. Revenue in that part of the business was almost unchanged in the first quarter compared to a year earlier. At £457m, the studios arm is almost as significant as the broadcasting division in terms of sales.
Attractive yield
The 7.2% yield is well supported by earnings and cash flows.
Despite the risks, I am confident ITV will maintain the dividend. I also see the shares as very undervalued, offering the scope for share price gain in coming years.
That is why I have bought more of this FTSE 250 share for my portfolio in recent months.
